UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999 or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________ to
____________.
Commission file number: 1-3368
THE EMPIRE DISTRICT ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Kansas 44-0236370
(State of Incorporation) (I.R.S. Employer
Identification No.)
602 Joplin Street, Joplin, Missouri 64801
(Address of principal executive offices) (zip code)
Registrant's telephone number: (417) 625-5100
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ___
Common stock outstanding as of August 1, 1999: 17,234,780 shares.
THE EMPIRE DISTRICT ELECTRIC COMPANY
INDEX
Page Number
Part I - Financial Information:
Item 1. Financial Statements:
a. Statement of Income 3
b. Balance Sheet 6
c. Statement of Cash Flows 7
d. Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Recent Developments.. 9
Results of Operations.. 10
Liquidity and Capital Resources 14
Year 2000 16
Forward Looking Statements 18
Item 3. Quantitative and Qualitative Disclosures About 19
Market Risk
Part II- Other Information:
Item 1. Legal Proceedings - (none)
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities - (none)
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENT OF INCOME (UNAUDITED)
Three Months Ended
June 30,
1999 1998
Operating revenues:
Electric $ 53,044,738 $ 56,011,199
Water 264,446 257,951
53,309,184 56,269,150
Operating revenue deductions:
Operating expenses:
Fuel 10,378,173 10,142,344
Purchased power 11,619,380 11,038,856
Other 7,716,698 7,667,021
Merger Related Expenses 3,061,654 -
Total operating expenses 32,775,905 28,848,221
Maintenance and repairs 4,212,373 3,560,677
Depreciation and amortization 6,535,755 6,218,930
Provision for income taxes 1,848,270 3,643,050
Other taxes 2,915,118 2,966,212
48,287,421 45,237,090
Operating income 5,021,763 11,032,060
Other income and deductions:
Allowance for equity funds used 26,324 -
during construction
Interest income 53,711 26,116
Other - net (14,921) (152,302)
65,114 (126,186)
Income before interest charges 5,086,877 10,905,874
Interest charges:
First mortgage bonds 4,618,614 4,491,564
Commercial paper 298,767 190,203
Allowance for borrowed funds used (240,388) (88,845)
during construction
Other 107,398 101,836
4,784,391 4,694,758
Net income 302,486 6,211,116
Preferred stock dividend requirements 597,333 604,085
Net income applicable to common stock $ (294,847) $ 5,607,031
Weighted average number of common 17,203,177 16,873,265
shares outstanding
Basic and diluted earnings per
weighted average share of common stock $ (0.02) $ 0.33
Dividends per share of common stock $ 0.32 $ 0.32
See accompanying Notes to Financial Statements.
STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended
June 30,
1999 1998
Operating revenues:
Electric $ 107,536,391 $ 107,157,548
Water 514,906 499,842
108,051,297 107,657,390
Operating revenue deductions:
Operating expenses:
Fuel 19,610,383 16,294,048
Purchased power 22,627,475 25,524,105
Other 15,804,114 15,065,446
Merger Related Expenses 3,061,654 -
Total operating expenses 61,103,626 56,883,599
Maintenance and repairs 8,105,290 7,639,192
Depreciation and amortization 12,954,574 12,386,532
Provision for income taxes 4,785,840 5,597,890
Other taxes 6,076,377 6,058,344
93,025,707 88,565,557
Operating income 15,025,590 19,091,833
Other income and deductions:
Allowance for equity funds used 56,845 -
during construction
Interest income 94,670 51,383
Other - net (114,417) (348,952)
37,098 (297,569)
Income before interest charges 15,062,688 18,794,264
Interest charges:
Long-term debt 9,237,228 8,636,856
Commercial paper 499,133 587,119
Allowance for borrowed funds used (403,894) (162,050)
during construction
Other 189,982 180,725
9,522,449 9,242,650
Net income 5,540,239 9,551,614
Preferred stock dividend requirements 1,196,513 1,208,170
Net income applicable to common stock $ 4,343,726 $ 8,343,444
Weighted average number of common 17,166,527 16,834,170
shares outstanding
Basic and diluted earnings per
weighted average share of common stock $ 0.25 $ 0.50
Dividends per share of common stock $ 0.64 $ 0.64
See accompanying Notes to Financial Statements.
STATEMENT OF INCOME (UNAUDITED)
Twelve Months Ended
June 30,
1999 1998
Operating revenues:
Electric $ 239,179,673 $ 228,689,475
Water 1,072,525 993,983
240,252,198 229,683,458
Operating revenue deductions:
Operating expenses:
Fuel 45,192,399 37,720,923
Purchased power 44,675,911 49,470,232
Other 32,710,749 30,228,157
Merger Related Expenses 3,061,654 -
Total operating expenses 125,640,713 117,419,312
Maintenance and repairs 17,988,969 13,976,300
Depreciation and amortization 25,548,678 24,527,011
Provision for income taxes 15,377,950 15,747,247
Other taxes 12,390,354 11,725,002
196,946,664 183,394,872
Operating income 43,305,534 46,288,586
Other income and deductions:
Allowance for equity funds used 65,783 150,524
during construction
Interest income 307,087 131,571
Other - net (606,022) (634,073)
(233,152) (351,978)
Income before interest charges 43,072,382 45,936,608
Interest charges:
First mortgage bonds 18,474,205 16,934,088
Commercial paper 571,754 1,346,170
Allowance for borrowed funds used (641,888) (245,260)
during construction
Other 356,348 330,734
18,760,419 18,365,732
Net income 24,311,963 27,570,876
Preferred stock dividend requirements 2,400,126 2,416,340
Net income applicable to common stock $ 21,911,837 $ 25,154,536
Weighted average number of common 17,097,516 16,763,583
shares outstanding
Basic and diluted earnings per
weighted average share of
common stock $ 1.28 $ 1.50
Dividends per share of common stock $ 1.28 $ 1.28
See accompanying Notes to Financial Statements.
BALANCE SHEET
June 30,
1999 December 31,
(Unaudited) 1998
ASSETS
Utility plant, at original cost:
Electric $ 850,118,531 $ 832,484,754
Water 6,508,937 6,398,086
Construction work in progress 27,402,994 16,701,068
884,030,462 855,583,908
Accumulated depreciation 296,085,357 283,337,538
587,945,105 572,246,370
Current assets:
Cash and cash equivalents 3,508,369 2,492,716
Accounts receivable - trade, net 13,759,402 13,645,641
Accrued unbilled revenues 6,675,804 6,218,889
Accounts receivable - other 3,826,540 1,590,536
Fuel, materials and supplies 16,549,506 15,704,678
Prepaid expenses 107,818 929,447
44,427,439 40,581,907
Deferred charges:
Regulatory assets 38,258,358 35,999,139
Unamortized debt issuance costs 3,531,477 3,660,800
Other 2,415,251 805,568
44,205,086 40,465,507
Total Assets $ 676,577,630 $ 653,293,784
CAPITALIZATION AND LIABILITIES:
Common stock, $1 par value, 17,267,629
and 17,108,799 shares issued and
outstanding, respectively $ 17,267,629 $ 17,108,799
Capital in excess of par value 159,889,317 156,975,596
Retained earnings (Note 2) 49,059,902 55,706,779
Total common stockholders' equity 226,216,848 229,791,174
Preferred stock 32,901,800 32,901,800
Reacquired capital stock (449,583) (267,537)
Long-term debt 246,114,503 246,092,905
504,783,568 508,518,342
Current liabilities:
Accounts payable and accrued 18,061,325 17,096,272
liabilities
Commercial paper 34,000,000 14,500,000
Customer deposits 3,526,902 3,438,987
Interest accrued 4,225,460 4,113,300
Taxes accrued, including income taxes 3,294,982 -
63,108,669 39,148,559
Noncurrent liabilities and deferred
credits:
Regulatory liability 15,843,689 16,400,125
Deferred income taxes 74,944,870 73,760,362
Unamortized investment tax credits 8,205,260 8,391,000
Postretirement benefits other than 4,395,986 4,463,883
pensions
Other 5,295,588 2,611,513
108,685,393 105,626,883
Total Capitalization and $ 676,577,630 $ 653,293,784
Liabilities
See accompanying Notes to Financial Statements.
STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
1999 1998
Operating activities:
Net income $ 5,540,239 $ 9,551,614
Adjustments to reconcile net income
to cash flows:
Depreciation and amortization 14,578,472 14,036,835
Pension income (1,331,442) (570,000)
Deferred income taxes, net 738,972 535,464
Investment tax credit, net (185,740) (188,560)
Allowance for equity funds used (56,845) -
during construction
Issuance of common stock for 401(k) 374,475 339,378
plan
Other - 66,958
Cash flows impacted by changes in:
Accounts receivable and accrued (2,806,680) (4,983,761)
unbilled revenues
Fuel, materials and supplies (844,829) (3,100,055)
Prepaid expenses and deferred (3,760,699) 138,170
charges
Accounts payable and accrued 965,054 110,242
liabilities
Customer deposits, interest and 3,495,055 5,840,021
taxes accrued
Other liabilities and other 3,947,620 137,450
deferred credits
Net cash provided by operating 20,653,652 21,913,756
activities
Investing activities:
Construction expenditures (29,523,758) (20,007,623)
Allowance for equity funds used 56,845 -
during construction
Net cash used in investing activities (29,466,913) (20,007,623)
Financing activities:
Proceeds from issuance of first - 49,672,000
mortgage bonds
Proceeds from issuance of common 2,698,076 2,531,716
stock
Reacquired Capital Stock (182,046) -
Dividends (12,187,116) (11,987,695)
Repayment of first mortgage bonds - (23,000,000)
Payment of debt issue costs - (482,065)
Net issuances (repayments) from 19,500,000 (19,500,000)
short-term borrowings
Net cash provided by (used in) 9,828,914 (2,766,044)
financing activities
Net increase (decrease) in cash and 1,015,653 (859,911)
cash equivalents
Cash and cash equivalents at beginning 2,492,716 2,545,282
of period
Cash and cash equivalents at end of $ 3,508,369 $ 1,685,371
period
See accompanying Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Summary of Significant Accounting Policies
The accompanying interim financial statements do not include
all disclosures included in the annual financial statements and
therefore should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
The information furnished reflects all adjustments, consisting
only of normal recurring adjustments, which are in the opinion of
the Company necessary to present fairly the results for the interim
periods presented.
Note 2 - Retained Earnings
Balance at January 1, 1999 $ 55,706,779
Changes January 1 through March 31:
Net Income 5,237,753
Quarterly cash dividends on common stock:
- $0.32 per share (5,478,855)
Quarterly cash dividends on preferred stock:
8-1/8% cumulative - $0.203125 per share (503,953)
5% cumulative - $0.125 per share (47,728)
4-3/4% cumulative - $0.11875 per share (47,500)
Total changes January 1 through March 31 (840,283)
Balance April 1, 1999 54,866,496
Changes April 1 through June 30:
Net Income 302,486
Quarterly cash dividends on common stock:
- $0.32 per share (5,512,442)
Quarterly cash dividends on preferred stock:
8-1/8% cumulative - $0.203125 per share (503,952)
5% cumulative - $0.125 per share (45,842)
4-3/4% cumulative - $0.11875 per share (46,844)
Total changes April 1 through June 30 (5,806,594)
Balance June 30, 1999 $ 49,059,902
Note 3 - Regulatory Assets
Certain expenses and credits, normally reflected in income as incurred,
are accounted for as assets when included in rates and recovered from or
refunded to customers in accordance with Statement of Financial Accounting
Standards No. 71. In the second quarter of 1999, the Company established
additional regulatory assets in the aggregate amount of $3.0 million, a
significant portion of which are fuel contract settlement costs resulting
from the Iatan coal contract that was renegotiated on April 1, 1999.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RECENT DEVELOPMENTS
The Company and UtiliCorp United Inc., a Delaware corporation
("UtiliCorp"), have entered into an Agreement and Plan of Merger,
dated as of May 10, 1999 (the "Merger Agreement"), which provides
for a merger of the Company with and into UtiliCorp, with UtiliCorp
being the surviving corporation (the "Merger"). Under the terms of
the Merger Agreement, UtiliCorp is offering $29.50 for each share
of Common Stock of the Company, payable in UtiliCorp common stock
or cash. UtiliCorp also will assume approximately $260 million of
existing debt of the Company, including its first mortgage bonds.
The Merger Agreement contains a collar provision under which the
value of the merger consideration per share will decrease if
UtiliCorp's common stock is below $22 per share preceding the
closing and will increase if UtiliCorp's common stock is above $26
per share preceding the closing. Stockholders of the Company may
elect to take cash or stock, but total cash paid to stockholders
will be limited to no more than 50% of the total Merger
consideration, and the UtiliCorp common stock that may be issued in
the Merger is limited to 19.9% of the then outstanding common stock
of UtiliCorp.
The Merger, which was unanimously approved by the Boards of
Directors of the constituent companies, is expected to close after
all of the conditions to the consummation of the Merger are met or
waived. The Merger is conditioned, among other things, upon
approval of stockholders of the Company, approvals of federal
regulatory agencies and approvals of state regulatory authorities
in states where the combined company will operate. Other
conditions in the Merger Agreement require the Company to redeem
all of its outstanding preferred stock according to its terms prior
to the closing and to obtain the consent of holders of its
outstanding first mortgage bonds to a modification of a dividend
limitation provision relating to successor corporations which is
contained in the Company's Indenture of Mortgage and Deed of Trust,
dated as of September 1, 1944, as amended and supplemented (the
"Mortgage"), pursuant to which its first mortgage bonds are issued.
The Company has received the requisite consents to amend the
dividend limitation in its Mortgage and has entered into a
supplemental indenture in order to implement that amendment. The
supplemental indenture will not become effective and no consent fee
will be paid, however, until the merger is completed. On August 2,
1999, the Company redeemed all of its outstanding preferred stock
for approximately $33.1 million. In addition, the Company has
called a special meeting of stockholders to be held on September 3,
1999, for the purpose of voting on the proposed merger with
UtiliCorp. UtiliCorp is not required to obtain its stockholders'
approval of the merger.
UtiliCorp is a multinational energy and energy services
company headquartered in Kansas City, Missouri. It has regulated
utility operations in eight states and energy operations in New
Zealand, Australia, the United Kingdom and Canada. It also owns
non-utility subsidiaries involved in energy trading; natural gas
gathering, processing and transportation; energy efficiency
services and various other energy-related businesses.
On May 17, 1999, the Company also announced that it had signed
a letter of intent to sell its water system to Missouri-American
Water Company. This water system provides service to three towns
in Missouri and accounted for 0.4% of the Company's gross operating
revenues in 1998 and 0.5% for the first two quarters of 1999.
Missouri-American Water Company is a part of the American
Water Works Company and serves in excess of 94,000 water customers
throughout seven districts in Missouri.
RESULTS OF OPERATIONS
The following discussion analyzes significant changes in the
results of operations for the three-month, six-month and twelve-
month periods ended June 30, 1999, compared to the same periods
ended June 30, 1998.
Operating Revenues and Kilowatt-Hour Sales
Of the Company's total electric operating revenues during the
second quarter of 1999, approximately 38% were from residential
customers, 30% from commercial customers, 19% from industrial
customers, 5% from wholesale on-system customers and 3% from
wholesale off-system transactions. The remainder of such revenues
were derived from miscellaneous sources. The percentage changes
from the prior year in kilowatt-hour ("Kwh") sales and revenue by
major customer class were as follows:
Operating
Kwh Sales Revenues
Six Twelve Six Twelve
Second Months Months Second Months Months
Quarter Ended Ended Quarter Ended Ended
Residential (12.4)% (2.1)% 2.6% (9.1)% (1.1)% 5.2%
Commercial (3.9) 1.3 3.7 (5.5) 0.3 4.7
Industrial 4.2 5.3 3.7 3.2 4.5 4.2
Wholesale On- (3.9) (1.8) 3.1 (4.1) (3.3) 3.3
System
Total System (4.7) 0.7 3.1 (5.1) 0.3 4.7
Residential and commercial Kwh sales and revenues were down
during the second quarter of 1999 compared to the second quarter of
1998 due mainly to unusually mild temperatures during May and June
of 1999 as compared to above-average temperatures during the same
period of 1998. Revenues were positively impacted by the annual
rate increase of $358,848 (6.6%) granted by the Arkansas Public
Service Commission ("Arkansas Commission") effective August 24,
1998.
Industrial Kwh sales and related revenues, which are not
particularly weather-sensitive, were positively affected during the
second quarter of 1999 by continuing increases in business activity
throughout the Company's service territory as well as the 1998
Arkansas rate increase.
On-system wholesale Kwh sales and revenues decreased during
the second quarter of 1999 reflecting the mild temperatures
described above.
For the six months ended June 30, 1999, Kwh sales to and
revenue from the Company's residential and on-system wholesale
customers decreased, reflecting the mild temperatures experienced
during the second quarter of 1999 while Kwh sales and revenues from
the Company's commercial customers increased slightly. Industrial
Kwh sales and related revenues, which are not particularly weather-
sensitive, increased due to continuing increases in business
activity throughout the Company's service territory. Residential,
commercial and industrial revenues for the six months ended June
30, 1999 were positively impacted by the 1998 Arkansas rate
increase.
For the twelve months ended June 30, 1999, Kwh sales to and
revenue from the Company's residential and commercial customers
increased, reflecting the warmer temperatures experienced during
the third quarter of 1998. Industrial sales and revenue continued
to grow due to strong business activity in the Company's service
territory. On-system wholesale Kwh sales and related revenue
increased during the twelve-month period reflecting the weather
conditions and continuing increases in business activity discussed
above. Residential, commercial and industrial revenues for the
twelve months ended June 30, 1999 were also positively impacted by
twelve months of the Missouri rate increases that were effective
July 28, 1997 and September 19, 1997 as well as the 1998 Arkansas
rate increase discussed above.
Off-System Transactions
In addition to sales to its own customers, the Company also
sells power to other utilities as available and also provides
transmission service through its system for transactions between
other energy suppliers. During the second quarter of 1999, revenues
from such off-system transactions were approximately $2.5 million,
compared with approximately $2.8 million during the second quarter
of 1998. Off-system revenues were approximately $4.1 million for
both of the six-month periods ended June 30, 1999 and 1998. For
the twelve months ended June 30, 1999, revenues from such off-
system transactions were approximately $8.3 million as compared to
$8.1 million for the twelve months ended June 30, 1998. The margin
on such off-system sales is lower than on sales to the Company's on-
system customers. In addition, pursuant to an order issued by the
FERC and subsequent tariffs filed by the Company and the Southwest
Power Pool ("SPP"), these off-system sales have been opened up to
competition. The Company cannot predict, however, the effect such
competition will have on its future operations or financial
results. Reference is made to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 under the caption
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Competition" for more information on these
open-access tariffs.
The Company is a member of the SPP, a regional division of the
North American Electric Reliability Council, which requires its
members to maintain reserve margins of 12.00%. The Company is also
a member of the Western Systems Power Pool ("WSPP"), a marketing
pool that provides agreements that facilitate the purchase and sale
of wholesale power among members. Most of the United States
electric utilities are now parties to this agreement.
On February 8, 1999, the Company filed a petition with the
FERC seeking approval to sell power at market-based rates. In this
filing, the Company also requested approval for a rate schedule
that would allow the Company to sell, assign or otherwise transfer
transmission capacity that it holds on other systems or on its own
system. This petition was approved by the FERC on April 9, 1999.
The primary benefit of the market-based power tariff is that
it will remove the rate cap on power that is sold under any of the
WSPP schedules that previously restricted the Company to a margin
of $22 per Mwh above cost. This tariff would apply to off-system
sales by the Company to other utilities and power brokers. This
change could result in an increase in revenue during the summer
season when power is selling at higher prices. The revenue impact
of this change, however, is not expected to be significant during
any season other than the summer season. The magnitude of any such
increase will be affected by the availability of purchased power in
the bulk power market, generation fuel costs and the requirements
of other electric systems during this season. As a result of its
inability to control or predict these factors, the Company cannot
currently predict the effect these tariffs will have on its future
operations or financial results.
Operating Revenue Deductions
During the second quarter of 1999, total operating expenses
increased approximately $3.9 million (13.6%) compared with the same
period last year. Merger related expenses, which are not tax
deductible, accounted for $3.1 million of this increase. A
significant portion of these expenses include a payment to the
Company's financial advisors for a part of the agreed upon
transaction fee for their financial services in connection with the
merger. This agreement calls for payment of 25% of the transaction
fee upon execution of the merger agreement, 25% upon stockholder
approval of the merger and the remaining 50% upon the consummation
of the merger, payable upon closing. Including the payment to be
made under this agreement, merger costs are expected to be
approximately $2.7 million in the third quarter of 1999.
Purchased power costs increased approximately $0.6 million
(5.3%) during the period, primarily due to decreased availability
of the Asbury Plant in the second quarter as compared to last year
because of a timing difference in spring maintenance outages. An
outage at the Asbury Plant in January of 1998, initially caused by
a generator winding problem, was extended to perform spring
maintenance originally scheduled for the second quarter. The
Asbury Plant began this year's spring outage in early April and
returned to service in early May. As a result of these timing
differences in the spring outages, purchased power costs were
greater during the second quarter of 1999 as compared to the second
quarter of 1998.
Total fuel costs increased approximately $0.2 million (2.3%)
during the second quarter of 1999 as compared to the same period in
1998 primarily reflecting the increased generation from the higher-
cost gas turbines at the State Line Power Plant while the Asbury
Plant was down for spring maintenance in April.
Other operating expenses increased slightly during the period.
Maintenance and repair expense increased approximately $0.7 million
(18.3%) during the quarter, primarily due to expenses associated
with the Asbury maintenance outage.
Depreciation and amortization expenses increased approximately
$0.3 million (5.1%) during the quarter due to increased levels of
plant and equipment placed in service. Total income taxes
decreased $1.8 million (49.3%) during the second quarter of 1999
due primarily to a decrease in taxable income. Other taxes
decreased slightly during the quarter.
For the six months ended June 30, 1999, total operating
expenses were up approximately $4.2 million (7.4%). Merger related
expenses accounted for $3.1 million of this increase. Total fuel
costs increased $3.3 million (20.4%) while purchased power costs
decreased $2.9 million (11.4%), a net increase of $0.4 million
(1.0%). These differences were mainly due to an increased
utilization of the Company's own generating facilities resulting in
less need for purchased power. Other operating expenses increased
$0.7 million (4.9%) due mainly to an increase in general and
administrative costs.
Maintenance and repairs expense increased $0.5 million (6.1%)
for the six months ended June 30, 1999 compared to the same period
in 1998 primarily due to increased levels of distribution
maintenance. Total provisions for income taxes decreased $0.8
million (14.5%) due to a decrease in taxable income. Other taxes
increased slightly during the period.
During the twelve months ended June 30, 1999, total operating
expenses increased approximately $8.2 million (7.0%) compared to
the year ago period. Merger related expenses accounted for $3.1
million of this increase. Total purchased power costs were down
approximately $4.8 million (9.7%) while total fuel costs were up
approximately $7.5 million (19.8%) during the twelve-month period.
These differences were due primarily to the greater availability
and increased usage of the Company's higher-cost gas-fired
combustion turbines at the State Line Power Plant during the first
and second quarters of 1999 and from increased generation at both
the State Line Power Plant and the Energy Center during the third
quarter of 1998 due to increased customer demand resulting from
warmer temperatures. Higher purchased power costs during the third
quarter of 1998 also contributed to the increased usage of the
Company's gas-fired combustion turbines.
Other operating expenses increased approximately $2.5 million
(8.2%) during the twelve months ended June 30, 1999, compared to
the same period last year due primarily to higher general and
administrative and customer accounts expenses. Approximately $0.7
million of this increase was a one-time charge during the third
quarter of 1998 due to the initiation of the Directors Stock Unit
Plan, a stock-based retirement compensation program for the
Company's Directors. The remainder of the increase resulted
primarily from $0.7 million in increased costs for outside services
and $0.8 million in increased costs for the employee health care
plan
Maintenance and repair expenses increased approximately $4.0
million (28.7%) during the twelve months ended June 30, 1999,
compared to the prior period. This increase was primarily due to
the scheduled maintenance on the gas-fired combustion turbines at
the Energy Center and the State Line Power Plant during the fourth
quarter of 1998 and increased levels of distribution maintenance.
Depreciation and amortization expense increased approximately $1.0
million (4.2%) due to increased levels of plant and equipment
placed in service. Total provision for income taxes decreased $0.4
million (2.4%) due to lower taxable income during the current
period. Other taxes increased $0.7 million (5.7%) due primarily to
increased property taxes.
Nonoperating Items
Total allowance for funds used during construction ("AFUDC")
increased during each of the periods presented compared to prior
year levels, reflecting the new construction beginning at the State
Line Power Plant.
Other-net deductions decreased during each of the periods
presented compared to prior year levels, reflecting increasing
profit margins for the Company's non-regulated fiber optics leasing
venture. Interest income increased slightly for all periods
presented.
Interest charges on first mortgage bonds increased $0.1
million (2.8%) during the second quarter of 1999, $0.6 million
(7.0%) for the six months ended June 30, 1999 and $1.5 million
(9.1%) for the twelve months ended period when compared to the same
periods last year due to the issuance of $50 million of the
Company's First Mortgage Bonds in April 1998. These proceeds were
used to repay $23 million of the Company's First Mortgage Bonds due
May 1, 1998 and to repay short-term indebtedness, including that
incurred in connection with the Company's construction program.
Commercial paper interest increased $0.1 million (57.1%) during the
second quarter of 1999 as compared to the same period in 1998, but
decreased $0.1 million (15.0%) for the six months ended June 30,
1999 and $0.8 million (57.5%) for the twelve months ended period
due to decreased usage of short-term debt for financing purposes.
Commercial paper interest is expected to increase in the third
quarter of 1999 due to the Company's financing needs related to its
ongoing construction program.
Earnings
For the second quarter of 1999, earnings per share of common
stock were $(0.02) compared to $0.33 during the second quarter of
1998. Earnings per share were down primarily due to the unusually
mild temperatures in May and June of 1999 as well as the $3.1
million in merger costs recorded in June, but were positively
impacted by the 1998 Arkansas rate increase. Excluding the merger
charges, earnings per share would have been $0.16 for the second
quarter of 1999.
Earnings per share for the six months ended June 30, 1999,
were $0.25 compared to $0.50 for the six months ended a year
earlier. For the twelve months ending June 30, 1999, earnings per
share of common stock were $1.28 compared to $1.50. Earnings per
share were down during these periods primarily due to the reasons
discussed above, but were also positively impacted by the 1998
Arkansas rate increase. In addition, the twelve months ended
earnings per share were somewhat impacted by the 1997 Missouri rate
increase as well as the warmer temperatures during the third
quarter of 1998. Excluding the $3.1 million in merger costs,
earnings per share would have been $0.43 for the six months ended
June 30, 1999 and $1.46 for the twelve months ended June 30, 1999.
Competition
The Arkansas Legislature passed a bill in April 1999 that
would deregulate the state's electricity industry as early as
January 2002. The bill would freeze rates for three years for
residential and small business customers of utilities that seek to
recover stranded costs, and freeze rates for one year for
residential and small business customers of utilities, such as the
Company, that do not seek to recover stranded costs. This freeze
applies only to rate increases and does not apply to any fuel
adjustment clause or energy cost recovery rider approved by the
Arkansas Commission, such as the one the Company has to recover its
fuel and purchased power costs. The Company is currently engaged
in the regulatory proceedings that have commenced as a result of
the new law. Approximately 2.8% of the Company's operating revenue
for the twelve months ended June 30, 1999 was derived from sales
subject to Arkansas regulation.
Fuel
The Company's suit against Union Pacific and Kansas City
Southern Railway has been settled. The Company had filed suit on
August 22, 1997 seeking to void the existing contract and receive
restitution for damages due to nonperformance. This suit was a
result of the coal delivery problems at the Company's Asbury Plant,
mirroring those plaguing the industry in past years, which caused
the Company's Western coal inventory to fall to a 20-day supply by
the end of 1997. The settlement, which was effective as of July 2,
1999, settles all outstanding issues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's construction-related expenditures totaled $16.3
million during the second quarter of 1999, compared to $10.9
million for the same period in 1998. For the six months ended June
30, 1999, construction-related expenditures totaled $29.5 million
compared to $20.0 million for the same period in 1998.
Approximately $5.9 million of these expenditures during the second
quarter of 1999 and approximately $11.6 million of construction
expenditures during the first six months of 1999 were related to
additions to the Company's transmission and distribution systems to
meet projected increases in customer demand. Approximately $1.9
million of the second quarter's construction expenditures and
approximately $4.0 million during the first six months of 1999 were
related to the Company's maintenance program for the gas-fired
combustion turbines at the Energy Center and State Line Power
Plant. Approximately $3.9 million during the second quarter of
1999 and $6.0 million during the first six months of 1999 were
related to the expansion project at the State Line Power Plant
described below. Approximately $2.1 million of these second
quarter expenditures and $3.4 million for the first six months of
1999 were related to additions and replacements at the Asbury and
Riverton Power Plants. Approximately $0.6 million of the second
quarter's construction expenditures and $1.2 million of the
expenditures for the first six months of 1999 were for capitalized
costs related to financial software and the development of the
Company's Centurion software. During the first six months of 1999,
approximately 29% of construction expenditures were satisfied with
internally generated funds.
On July 26, 1999, the Company and Westar Generating, Inc.
("WGI"), a subsidiary of Western Resources, Inc., entered into
definitive agreements for the construction, ownership and operation
of a 350-megawatt addition to the State Line Power Plant (the
"State Line Project"). This State Line Project will consist of
adding an additional combustion turbine, two heat recovery steam
generators and a steam turbine and auxiliary equipment to an
already existing combustion turbine. Work has begun and the State
Line Project is projected to be operational by June 2001. Pursuant
to the agreements with WGI, the Company will own an undivided 60%
interest in the State Line Project with WGI owning the remainder.
The Company will also be entitled to 60% of the capacity of the
State Line Project. The Company will contribute its existing 152-
megawatt State Line Unit No. 2 combustion turbine to the State Line
Project, and as a result, upon commercial operation, the State Line
Project will provide the Company with 150 megawatts of additional
capacity. The total cost of the State Line Project is estimated to
be $185 million. The Company's share of this amount, after the
transfer to WGI of an undivided 40% joint ownership interest in the
existing State Line Unit No. 2 and certain other property at book
value as described below, is expected to be approximately $100
million.
Prior to executing the agreements with WGI, the Company
entered into contracts with Siemens-Westinghouse Power Corporation
for the provision of major components for the State Line Project,
with Black & Veatch Corporation for engineering and management
services for the State Line Project, and with Williams Gas Pipeline
Central for the transportation of natural gas to the State Line
Project. WGI will, pursuant to the agreements with the Company,
reimburse the Company for 40% of expenditures made or to be made by
the Company in connection with the State Line Project, including
all payments made or to be made in connection with the contracts
listed above. In addition, pursuant to the agreements with the
Company, WGI will make monthly prepayments to the Company for the
future transfer of its 40% joint ownership interest in the existing
State Line Unit No. 2, as well as an interest in certain underlying
and surrounding land and other property and equipment now owned by
the Company. These prepayments are reflected in other deferred
credits on the balance sheet. See Item 1, "Financial Statements."
The Company's construction expenditures are expected to total
approximately $80.3 million in 1999, including approximately $32.5
million for its share of new generating facilities at the State
Line Project and $18.0 million for additions to the Company's
distribution system to meet projected increases in customer demand.
The Company currently estimates that internally generated
funds will provide at least 40% of the funds required for the
remainder of its 1999 construction expenditures. As in the past, in
order to finance the additional amounts needed for such
construction, the Company intends to utilize short-term debt and
sales of public offerings of long-term debt or equity securities,
including the sale of the Company's common stock pursuant to its
Dividend Reinvestment Plan and Employee Stock Purchase Plan as well
as internally-generated funds. The Company will continue to
utilize short-term debt as needed to support normal operations or
other temporary requirements and has recently received approval for
its line of credit to be increased from $50 million to $100
million. The Company financed its preferred stock redemption on
August 2, 1999 with approximately $33.1 million in commercial
paper. This increased the Company's short-term debt to $65.5
million as of August 10, 1999. After redeeming all of its
preferred stock, the Company is no longer restricted by its
Articles as to the amount of unsecured indebtedness that it may
have outstanding at any one time. See Part II - Item 2 "Changes in
Securities and Use of Proceeds" for more information.
Following announcement of the Merger, the ratings for the
Company's first mortgage bonds (other than the 5.20% Pollution
Control Series due 2013 and the 5.30% Pollution Control Series due
2013) were placed on credit watch with downward implication by each
of Moody's Investors Service, Standard & Poor's and Duff & Phelps
Credit Rating Company.
Year 2000
Year 2000 Background
Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed
and developed without considering the impact of the upcoming
century change. As a result, computer systems may fail completely
or produce erroneous results unless corrective measures are taken.
The Company is engaged in an on-going project to identify, evaluate
and implement changes to both information technology ("IT") and non-
IT systems in order to achieve Year 2000 readiness. The Company
has also become a member of the Edison Electric Institute's Year
2000 Committee and the Electric Power Research Institute's Y2K
Embedded Systems Program in order to assist in the implementation
of its Year 2000 Readiness Plan. In addition, the Company is
participating in the North American Electric Reliability Council's
("NERC") efforts to prepare mission critical systems for Year 2000
readiness. NERC's target was to have all mission critical electric
power production, transmission, and delivery systems Year 2000
ready by June 30, 1999. The Company has been working within that
framework and participated in an industry-wide Year 2000 drill on
April 9, 1999 with successful results. Essential sites and
facilities included in the drill were the control area
(dispatching), power generation sites, interconnect transmission
substations, and transmission lines. The Company plans to
participate in a second industry-wide drill on September 8 and 9,
1999.
NERC's 1999 second quarter report to the Department of
Energy indicated that more than 99% of the nation's electricity
supply is classified as Year 2000 ready or Year 2000 ready with
limited exceptions and 96% of all local power distribution systems
are certified ready for the new millennium. The Department of
Energy has announced that it will do "spot check" audits on a small
number of utilities to make sure the information reported in the
survey is correct.
The Company is using a multi-step approach in achieving its
Year 2000 Readiness Plan. These steps include creating awareness
of the Year 2000 problem, forming a Year 2000 task force,
developing procedures for documenting Year 2000 readiness,
developing a methodology for the Year 2000 Readiness Plan and
testing and remediation of Year 2000 affected items pursuant to the
Year 2000 Readiness Plan. Developing the methodology for the Year
2000 Readiness Plan includes creating and implementing an ongoing
communication program with both internal and external parties,
performing an inventory of possible Year 2000 affected items,
assessing and prioritizing each such inventory item as to level of
criticality, scheduling testing and remediation of such items in
order of criticality, and developing contingency planning. The
management consulting firm of Sargent & Lundy has reviewed the
process involving the implementation of the Year 2000 Readiness
Plan as well as the plan itself. Recommendations based on their
independent findings have been implemented as a step of the Year
2000 Readiness Plan.
The Company has purchased a new financial management software
package from PeopleSoft that is Year 2000 ready. The package
includes financial accounting systems for general ledger, accounts
payable and asset management; purchasing and inventory; human
resource systems for benefits, time and labor, and payroll; as well
as systems for budgeting and project tracking. All of the systems,
with the exception of asset management and the human resource
systems, are now being utilized. The asset management system is
expected to begin operation on October 1, 1999 and the human
resource systems are scheduled to begin operation in August 1999.
In addition, a new customer information system, Centurion, is being
developed internally which will be Year 2000 ready. Installation
of this system is expected to be completed in the third quarter of
1999 and is currently in the test phase. The installation of these
systems is anticipated to substantially mitigate the Company's Year
2000 exposure.
State of Readiness
A task force has been appointed and charged with documenting
and testing areas of the Company which may be affected by the Year
2000. The targeted areas include general preparation, power
generation, energy management systems, telecommunications,
substation controls and system protection and business information
systems. Within each of these areas, the task force examined the
status of IT systems, non-IT systems and third parties such as
vendors, customers and others with whom the Company does business.
The inventory of Year 2000 items was completed in September 1998.
Assessing and prioritizing each item within the Year 2000 inventory
as to the level of criticality was also completed in September
1998. The testing and remediation of the highest level of critical
items was completed in June 1999. The Year 2000 task force has
developed contingency plans in the event that unanticipated
problems are encountered. The Company has substantially completed
its Year 2000 testing and compliance projects as of June 30, 1999
with the few exceptions noted below.
The status of each of the targeted areas undergoing testing is as
follows:
General Preparation. Scheduled upgrades to the telephone switch
are 95% complete with the final upgrades scheduled to be completed
in the third quarter of 1999. The testing of other items was
completed by June 30, 1999.
Power Generation. Assessment, inventory and testing are complete
at all plants. There are a few items, mostly non-critical, that
need to be remediated at the plants. This will be completed as
soon as possible.
Energy Management Systems. The Company has installed major
upgrades to its Energy Management System hardware and software as a
result of Year 2000 related problems observed during preliminary
system testing. The Company has obtained readiness certifications
for most of the other related components and has completed testing
on components critical to the operations of the Energy Management
System and other related systems.
Telecommunications. The Company has worked with suppliers and
manufacturers to obtain readiness certifications for its various
telecommunications systems and components. The Company has
completed the testing of critical systems and components.
Substation Controls and System Protection. Testing of transmission
and distribution equipment uncovered a minor amount of equipment
that required Year 2000 remediation. That equipment has been
replaced.
Business Information Systems. As previously stated, the new
financial management software package from PeopleSoft is Year 2000
ready and the new Centurion customer information system, when
completed, is expected to be Year 2000 ready. As a result of the
implementation of the new software packages, several hardware
changes have been required throughout the Company, which has
delayed testing of the remaining systems. Currently, the testing
of these systems is 90% complete with the target date for the
completion of testing being the middle of the third quarter of
1999.
Third Parties. The Company has requested readiness certifications
from third party vendors for all of its core applications and
operating systems. However, all critical applications are being
tested regardless of whether a certification of readiness has been
obtained. In addition, the Company is contacting other third
parties with whom the Company does business (such as major
customers, power pools, power suppliers, transmission providers and
telecommunications providers) in order to assess their states of
readiness. This initial contact phase was completed at the end of
1998. The Company will continue to monitor the progress of these
third parties throughout the remainder of 1999. The Company is
conducting face to face meetings with its most critical suppliers
and its largest customers and is corresponding in writing with its
other suppliers and customers.
Year 2000 Costs
The Company currently estimates that total costs (which
include the costs of the new financial management software package,
the new customer information system and the hardware required to
accommodate the new software packages) to update all systems for
Year 2000 readiness will be approximately $4.9 million, of which
approximately $3.8 million have been incurred and capitalized as of
June 30, 1999 and $0.6 million have been incurred and expensed. Of
these capitalized costs, $0.5 million were included in the 1998
capital budget and $1.5 million are included in the 1999 capital
budget. Costs for specific Year 2000 remediation projects will be
charged to expense while costs to replace software for business
purposes other than addressing Year 2000 issues will be
capitalized.
Risk Assessment and Contingency Plans
At this time, the Company believes the most reasonably likely
worst case scenario would result from fuel constraints due to
supply failure(s), specifically natural gas, oil, water or other,
with the most likely being natural gas. The Company has assessed
the risk of this scenario and has formulated contingency plans to
mitigate the potential impact. As a part of these plans, the
Company is increasing its supply of coal at the Asbury and Riverton
Power Plants. Under normal conditions, the Company's targeted coal
inventory supply at both plants is approximately 45 days. As of
June 30, 1999, the supply of Western coal at the Asbury Plant was
approximately 88 days and the supply of blend coal was
approximately 108 days, while the supply of Western coal at the
Riverton Plant was approximately 45 days and the supply of blend
coal was approximately 94 days. In addition, the Company has the
ability to switch the fuel used by the combustion turbines at the
Energy Center and State Line Power Plants from natural gas to diesel
fuel should a disruption in natural gas delivery occur. The Company's
Year 2000 task force formed a contingency planning team which
followed guidelines established by the NERC to formalize a plan
with respect to the above worst case scenario and other
contingencies which may develop. This plan was filed with the NERC
on June 30, 1999.
The Company's Readiness Plan is designed to provide corrective
action with respect to Year 2000 risks. If the Plan is not
successfully carried out in a timely manner, or if unforeseen
events occur, Year 2000 problems could have a material adverse
impact on the Company. Management does not expect such problems to
have such an effect on its financial position or results of
operations.
FORWARD LOOKING STATEMENTS
Certain matters discussed in this quarterly report are
"forward-looking statements" intended to qualify for the safe
harbor from liability established by the Private Securities
Litigation Reform Act of 1995. Such statements address future
plans, objectives, expectations and events or conditions concerning
various matters such as capital expenditures (including those
planned in connection with the State Line Project), earnings,
competition, litigation, rate and other regulatory matters,
liquidity and capital resources, Year 2000 readiness (including
estimated costs, completion dates, risks and contingency plans) and
accounting matters. Actual results in each case could differ
materially from those currently anticipated in such statements, by
reason of factors such as the cost and availability of purchased
power and fuel; a significant delay in the expected completion of,
and unexpected consequences resulting from the merger with
UtiliCorp; electric utility restructuring, including ongoing state
and federal activities; weather, business and economic conditions;
legislation; regulation, including rate relief and environmental
regulation (such as NOx regulation); competition; including the
impact of deregulation on off-system sales; and other circumstances
affecting anticipated rates, revenues and costs.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. The Company is exposed to changes in
interest rates due to market conditions or changes in the Company's
credit ratings as a result of significant financing through its
issuance of fixed-rate debt and commercial paper. The Company
manages its interest rate exposure by limiting its variable-rate
exposure to a certain percentage of total capitalization, as set by
policy, and by monitoring the effects of market changes in interest
rates
If market interest rates average 1% more in 1999 than in 1998,
the Company's interest expense would increase, and income before
taxes would decrease, by approximately $340,000. This amount has
been determined by considering the impact of the hypothetical
interest rates on the Company's commercial paper balances as of
June 30, 1999. These analyses do not consider the effects of the
reduced level of overall economic activity that could exist in such
an environment. In the event of a significant change in interest
rates, management would likely take actions to further mitigate its
exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects,
the sensitivity analysis assumes no changes in the Company's
financial structure or credit ratings.
Commodity Price Risk. The Company is exposed to the impact of
market fluctuations in the price and transportation costs of coal,
natural gas, and electricity and employs established policies and
procedures to manage its risks associated with these market
fluctuations. At this time none of the Company's commodity
purchase or sale contracts meet the definition of financial
instruments.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
The Company's Restated Articles of Incorporation (the
"Articles") provide that, for so long as any of the Company's
cumulative preferred stock is outstanding, the amount of unsecured
indebtedness of the Company may not exceed 20% of the sum of the
outstanding secured indebtedness plus the capital and surplus of
the Company. Commencing on August 2, 1999, the date the Company
redeemed all of its outstanding preferred stock, and continuing for
so long as the Company does not issue any more preferred stock, the
Articles will not restrict the amount of unsecured indebtedness
that the Company may have outstanding at any one time.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of Common Stockholders was held on April
22, 1999.
(b) The following persons were re-elected Directors of the Company
to serve until the 2002 Annual Meeting of Stockholders:
M.F. Chubb, Jr. (13,401,721 votes for; 194,407 withheld
authority).
R. L. Lamb (13,398,048 votes for; 198,080 withheld
authority).
R. E. Mayes (13,389,638 votes for; 206,490 withheld
authority).
The term of office as Director of the following other
Directors continued after the meeting: V.E. Brill, R.D. Hammons,
J.R. Herschend, R.C. Hartley, F.E. Jefferies, M.W. McKinney, and
M. M. Posner.
Item 5. Other Information.
At June 30, 1999, the Company's ratio of earnings to fixed
charges, and ratio of earnings to fixed charges and preferred stock
dividend requirements, were 3.02x and 2.52x, respectively. See
Exhibit (12) hereto.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(4) (a) Thirtieth Supplemental Indenture dated as of July 1,
1999 to Indenture of Mortgage and Deed of Trust.
(b) Amendment No. 2, dated as of May 10, 1999, to the Rights
Agreement between the Company and ChaseMellon Shareholder
Services, successor to Manufacturers Hanover Trust
Company (Incorporated by reference to Exhibit Number 3 to
the Company's Registration Statement Form 8-A/A,
dated June 17, 1999).
(12) Computation of Ratios of Earnings to Fixed Charges
and Earnings to Combined Fixed Charges and Preferred Stock
Dividend Requirements.
(27) Financial Data Schedule for June 30, 1999.
(b) No reports on Form 8-K were filed during the second quarter of
1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE EMPIRE DISTRICT ELECTRIC COMPANY
Registrant
By /s/ R.B. Fancher
R. B. Fancher
Vice President - Finance
By /s/ G. A. Knapp
G. A. Knapp
Controller and Assistant Treasurer
August 13, 1999
EXHIBIT (12)
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND
REQUIREMENTS
Twelve
Months Ended
June 30, 1999
Income before provision for income taxes and $ 59,103,058
fixed charges (Note A)
Fixed charges:
Interest on first mortgage bonds $ 17,626,362
Amortization of debt discount and expense less 847,843
premium
Interest on short-term debt 571,754
Other interest 356,348
Rental expense representative of an interest 162,758
factor (Note B)
Total fixed charges 19,565,065
Preferred stock dividend requirements:
Preferred stock dividend requirements not 2,324,634
deductible for tax purposes
Ratio of income before provision for incomes 1.626
taxes to net income
Nondeductible dividend requirements 3,779,855
Deductible dividends 78,036
Total preferred stock dividend requirements 3,857,891
Total combined fixed charges and preferred stock $ 23,422,956
dividend requirements
Ratio of earnings to fixed charges 3.02x
Ratio of earnings to combined fixed charges and
preferred stock
dividend requirements 2.52x
NOTE A: For the purpose of determining earnings in the calculation of the
ratio, net income has been increased by the provision for income
taxes, non-operating income taxes and by the sum of fixed charges as
shown above.
NOTE B: One-third of rental expense (which approximates the interest factor).